Britain’s investment crisis

 

There are a number of complementary explanations for why economic recovery in Europe since the crash of 2007/8 has been so much weaker than was expected by governments - such as the necessary and inevitable shrinkage of the banking sector and the crisis in the eurozone.

But one of the most important causes, highlighted in a new report by McKinsey, is that there has been what it calls "an unprecedented weakness in private investment".

McKinsey says: "The fall in private investment between 2007 and 2011 was larger than any previous decline in absolute terms and four times the decrease in real GDP over the same period."

Which isn't very cheery.

We have felt the impoverishing impact of this investment slump here in Britain.

A few months after the last general election and the coalition government's first budget, the newly created Office for Budget Responsibility was forecasting that business investment would grow by 8.6% in 2011 and 8.4% in 2012, underpinning economic growth in those years of 2.1% and 2.6%.

In fact, business investment grew by just 2.9% last year, a third of the forecast rate, and is expected to increase by 3.8% in 2012 - which is one reason why the economy expanded by less than 1% in 2011 and is set to shrink this year.

Some of this weakness in investment in the UK can perhaps be seen as bad luck: it is difficult to blame the David Cameron and his colleagues for the mess in the eurozone, which has so shaken business confidence.

Also, a good deal of the investment squeeze is the poisonous legacy of the recklessness of banks in the boom years, which lent unprecedented and ludicrous sums to over-indebted property developers. The bust in property development was probably impossible to temper.

But that is not to absolve the government of all responsibility for the weakness of investment.

McKinsey points out that it is very unusual for a surge in investment to be the initial driver of economic recovery. It is typically a revival in consumption that provides the initial fuel.

But on this occasion, consumers have been unable to provide that fuel - partly because they are more indebted than they've ever been, and many of them want to save rather than spend, and partly because of the squeeze on their spending power from an increase in food and energy prices at a time of stagnation in earnings.

For the avoidance of doubt, ministers in this government have consistently and repeatedly told me that the British economy had become far too dependent in the boom years on consumer spending - and they recognised that a rebalancing towards investment was essential.

So although another of the Office for Budget Responsibility's forecasting booboos was to anticipate faster growth in consumer spending than has materialised, ministers were well aware that they could not count on the behaviour of consumers to lead the UK back to prosperity.

What the McKinsey report implies is that the government has done far too little to encourage an increase in business investment. And government officials, in their less guarded moments, pull their hair out and agree.

The problem is that the sort of thing that would lead to an economically meaningful increase in investment by big companies - which, as you will recall, are sitting on almost record amounts of cash - are in the box labelled "politically horrendous".

Here is a verbatim list of what one influential official believes the government needs to do:

1. Place fewer restrictions on immigration, especially of those with skills (and McKinsey adds that "there is evidence that immigration limits inhibit the expansion of the university sector");

2. Get going on the building of new airport runways in the south;

3. Abolish planning restrictions far more than has been done and be much less worried about building on the Green Belt.

This is how McKinsey puts it. "Even in the short term - and in today's weak demand conditions - government could unlock private investment by removing regulatory barriers that currently stand in the way."

But that is much easier to do in countries like Italy and Spain, whose markets are subject to many more restrictive practices than is true of British markets, than in the UK.

Over here, removal of the residual and significant regulatory barriers - such as who can come to Britain or where and how it is possible to build - is seen by influential groups of voters as a full frontal attack on the British way of life.

Which implies not that the government is powerless to spur investment and growth, just that it requires them to embrace the politics of confrontation in a way that has not been seen in this country since Mrs Thatcher.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    -11

    Comment number 13.

    As a first step get rid of Vince Cable, a populist by any measure always prepared to provide a glib response which is sure to enhance his popularity but in general anti business and a disaster for economic growth.

  • rate this
    -6

    Comment number 1.

    The truth is that this incompetent govt has created conditions of uncertainty and insecurity for individuals and Companies alike. On the one hand they want to bribe away Workers Rights (Beacroft type) on the other they have cut Capital Investment by the govt on key projects in their insular approach of trying to cut the deficit. A new Chancellor with credibility would change that overnight.

  • rate this
    -5

    Comment number 9.

    Talk to any property developer who wishes to build medium sized residential sites (100+ houses). The red tape, all the extra surveys that have to be done before even submitting a planning application, then the planning process, community levy, s106 planning gain - it is a wonder anything gets built

  • rate this
    -4

    Comment number 28.

    26. yes he is indeed wrong on most things including those mentioned by your good self.

    As for your last sentence, well it says it all really.

  • rate this
    -3

    Comment number 61.

    48. It's back to the 1930s for Bust Britain


    Yes 1930sB ritain abandoned free trade & imposed capital controls whilst govt regulated in favour of cartel formation. Actions such as these needlessly prolonging the depression's end until well 1960s. What is needed is 1980s supply side boost that crowds in private-sector consumption/investment spending.

 

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